Stock Thoughts on Wonderla Holidays

If you can dream it, you can do it. Always remember that this whole thing was started with a dream and a mouse – Walt Disney
Wonderla Holidays, one of the leading players in the INR 30 billion Indian amusement park Industry also has big dreams minus the mouse. The company operates three large amusement parks in the country at Kochi, Bangalore and Hyderabad with a 16 year track record of successful operations.
The company is run by the Chittilappilly family (promoters of V Guard) and has aspirations to become a pan India player opening a new amusement park every four years. As the company aspires to extend its footprints nationally, it has also undertaken a re-branding exercise to position itself as a “complete hospitality and entertainment brand”.
In this post, we take a hard look at the business of Wonderla from an investment perspective.

Basic Scrip Details

Business Model

Wonderla’s business model is actually very simple to understand. Acquire large land parcels at economical rates, design and build dry & water rides, generate cash through ticket & non-ticket revenue sources, plough back the internal accruals (plus debt, if necessary) to start a new park; Rinse and Repeat.

Key Financial Data

• Returns on Capital Employed (ROCE), one of the crucial metrics is down almost 75% in 5 years and now stands at 11.75% which is plain average.
• Even the other key metrics like OPM%, NPM% and EPS are on a southward journey
• Continuously rising sales and a reducing debt to equity ratios are comforting

• Sales growth is encouraging but profitability & ROE has recently gone for a toss.

Positive Factors

Strong tailwinds for the Industry– Amusement parks and theme parks are part of the leisure and entertainment industry. Globally the Industry is expected to grow at CAGR of 7.5% to reach INR 3.86 trillion. The Indian industry according to research studies are expected to grow at a much faster rate than the global average at CAGR of 19% to reach INR 70 billion by year 2021 from the present INR 30 billion.
With rising per capita income, increasing urbanization and sustained focus by government on improving the physical infrastructure / last mile connectivity, the Industry as such is having strong tailwinds for growth which should be favorable for Wonderla as well.
Long runway for growth with multiple growth levers: Wonderla Holidays is in a sweet spot with a long runway for growth.
Some of the Growth levers available:

• New parks– In the last 16 years the company has opened 3 parks. The latest one was in 2016 at Hyderabad and has helped the company with increased footfalls. The next one is planned at Chennai for which land has been procured and is projected to be operational by FY 2020. The company has stated in their annual reports their desire to open a park every four years.
• New Rides– In the existing parks to keep it fresh, new rides are planned and launched. On an average at least 1 new ride is introduced every year in the existing parks. This adds to the novelty factor as well as aids in bringing in repeat customers.
• Non utilized land in existing parks– As per 2016-17 annual report the details of non utilized land available for future development:

Bangalore –   42.55 acres out of total land of 81.75 acres
Kochi –          64.42 acres out of total land of 93.17 acres
Hyderabad-   22.50 acres out of total land of 49.50 acres
There is a combined 130 acres (57% of land parcel) available for future development which is significant and can be used for expansion / new rides / new resorts in the existing parks.

• Increased Non ticketing Revenue mix– Non ticket revenue sources include food, beverages, and merchandise from park visitors. Globally the revenue mix of ticket revenue to non- ticket revenue is 45: 55.  In India the ratio has been 80:20. This shows the potential available for generating more revenue per visitor which is non- linear in nature.

To their credit, Wonderla has reported a 63% increase in non-ticket revenue last year. Also as per the annual  report the average non-ticket revenue per visitor has gone up from INR 155 to INR 214 in FY 2017. Compared to global         standards there is still room for further growth of non-ticket revenue share for Wonderla.

• Increased revenue from Resort business– Wonderla operates a 3 star 84 room resort in its Bangalore Park. The resort also has a well-equipped board room along with conference facilities for targeting the corporate segment in addition to targeting the traditional retail recreational & leisure segment.   As per the latest annual report the resort business generated 11.97 Cr in FY 17 with a 56% occupancy rate.

There is further scope for growth in occupancy rate as well as launch of new resorts in existing parks of Kochi & Hyderabad based on market demand
Management – Among many other things, one of the most significant criteria an investor should look before investing is the quality & integrity of the management as well as to see if there are any actions in the past which are minority shareholders’ unfriendly.
Wonderla is run by the Chittilappilly family, the same group behind V-Guard (listed since 2008) and have a reputation for being able and prudent. Also there have been no instances of any shareholder unfriendly actions.
They have been conservative in capital allocation but forward looking with a good pulse of the trends in the Industry. The management is now investing in the next generation technologies of Augmented Reality (AR) and Virtual Reality (VR) with the first video being shot at Hollywood.
Virtually Zero debt Company– The latest debt to equity ratio stands at a very healthy 0.04. Being in a capital intensive business it is commendable that the capital allocation policy has been prudent with growth coming through internal accruals. Even if the management decides to take on debt for future parks the company has sufficient leverage leeway.
Cost savings through Internal R&D – The management has done a brilliant thing of investing in own R&D capabilities to design and build rides. This gives the company significant cost advantages as it does not have to depend fully on local vendors or foreign suppliers.
As per the annual reports the company is able to internally design and build one-third of the new rides in a park with a cost savings of around 30%. This internal capabilities also lead to faster execution of new rides as well as quicker maintenance / refurbishment of existing rides.

Key Concerns

“When investing, pessimism is your friend, euphoria the enemy”- Warren Buffet
My underlying thought process before investing in a stock is to take a critical look by trying to identify as many things that could possibly go wrong and then see if the idea still makes sense for investing.  It’s best to remember Murphy’s Law “If anything can go wrong, it will” before betting on an investment idea.
No Sustainable Moat – I thought long and hard about this. Availability of large land parcels and inhouse R&D are certainly competitive advantages the company enjoys but does the company enjoy any sustainable moats making the business model impregnable?
Ask yourself this question: What if a new competitor with very deep pockets (think of what Reliance Jio did to  the telcos) sets up a new park? What if Disney or Universal studio’s of the world start a park in India? The company is planning to spend INR 350 crores for the upcoming park at Chennai. Then compare this with the amounts global biggies with deep pockets budget for a new park.
In 2015 Disney started its park in Shanghai with an investment of USD 5 billion (yes , you read it right) and if Disney or any other global player is going to open a new park in India, will Wonderla be able to defend its market share without the business getting impacted at all? I certainly don’t think so.
Key Financial metrics on a southward Journey– As seen in the financial data section the ROCE, OPM %, NPM % and EPS have been declining. Investors need to keep a close watch to see if these are one off due to provisions for tax disputes and tough business conditions of the last couple of years or is this part of a larger trend.
Evolving customer tastes and increased customer expectations– Increased expectations and finer tastes from well-traveled customers:

1. Thanks to rising global travel, many people have traveled abroad over the last decade and have experienced rides in the Disney’s and Sentosa’s of the world. The point is, for today’s well-traveled folks, comparison with these international standard amusement parks are but natural. There is still a gulf in standards between international parks and wonderla which may impact brand advocacy.
2. Rising disposable income and cheaper airfares make travel to Dubai , Sentosa Singapore or Disneyworld Hong kong to visit some of the best amusement parks in the world a lot more feasible and desirable

Falling footfalls in existing parks :

1. Subdued discretionary spending due to uncertainty in IT sector & job market
2. Increased ticket / non-ticket prices due to price hike & GST
3. Susceptibility to political agitations like Cauvery water protests on the Bangalore- Mysore highway like last year
4. Susceptibility to vagaries of weather like heavy rainfall (Hyderabad floods last year) or extreme heat

Capital intensive business– All things being equal an investor is better off in an asset light business which spews cash. Wonderla is in a capital intensive business with high cost of setup for land and equipment. The costs will only rise in the future for newer parks.
The promoter Arun Chittilapilly himself acknowledges in this interview on the rising land costs. It cost 5 crores to set up Bangalore Park in 2005 whereas it rose to 82 crores for land and civil works for Hyderabad Park.  The new park at Chennai is expected to cost INR 350 Cr as per the management and we can see the steep rise in cost of setting up new parks
Parks getting Old– The Kochi park is 16 years old and the Bangalore park is 11 years old. These parks are witnessing fall in footfalls. This is primarily due to saturation in the market and absence of novelty factor. Wonderla introduces 1 new ride per year to get repeat customers but in many cases the new rides may not be enticing enough for some customers to visit the park again
Land acquisition challenges– Land is the most crucial resource required to start a new park. Acquiring large land parcels to start a new park in a new city may be a challenge in the future.
Invariably the park will have to be set up in the outskirts which increases the commute time for city dwellers (thereby market potential is not maximized)along with challenges with last mile connectivity. Even if the land acquisition goes through there could be possibility of litigation as seen in the Hyderabad park
Price Sensitive market: India generally is a price sensitive market with average ticket prices at INR 1000 against global average of INR 3000. Post GST, the business is taxed at 28% which has further increased the total cost of a ticket.
The company like other resorts also follows multiple ticket discount strategies implying the company may not have the pricing power to pass on additional costs (a la ITC) or needs to provide deal sweeteners for certain business segments to increase footfalls or get bulk bookings
Mishap Risk – Some businesses are more susceptible to negative publicity and losses in the unfortunate event of a mishap. E.g. Airline Industry (Plane accident), Hospital Industry (botched up surgery).
Hope such an event never happens but in the worst case scenario of an accident at any of the parks will lead to negative publicity hampering the brand as well as impacting the footfalls.Barring a small mishap in 2012 at the Bangalore Park the company has been successful to maintain a good safety track record.
Other Avenues for Leisure and Entertainment– Wonderla is part of the leisure and entertainment Industry. Though Wonderla may be a leading player in amusement park segment in the cities it is operates, there is a larger threat of other avenues for leisure like visiting Malls, Movies, Fishing, Trekking, Concerts, Stand up Comedy and Plays etc. which also vie for the same share of customer’s entertainment budget. Hence along with the other amusement parks the other avenues of leisure are also competitors for the company
Valuation has been left out consciously in this piece as this is not a recommendation piece but an informative post (I am not SEBI registered advisor). Also decisions to buy are a combination of multiple factors including one’s circle of competence, risk appetite and the desired level of margin of safety. Not getting into multiple valuation models like PEG, DCF etc. but even by simple PE method the stock is not definitely cheap at 53 PE. Personally, below the 300 mark, I will find the stock entering the attractive territory.

Final Thoughts

Wonderla Holidays is definitely a stock worthy to be included in our investing watch list.  Notwithstanding the various concerns raised, Wonderla has a long runway for growth along with multiple growth levers, an able management at helm and a virtually zero debt company, making it a good business to own at the right price.
(Disclaimer:  No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only)